The Forward View – Global: June 2017

Overview:

Although the pace of global economic growth stabilised in early 2017, the reflation of the global economy continues. Business survey results remain overwhelmingly positive in the big advanced economies, the most timely “hard” economic data on new orders, industrial output and trade flows point to continued growth and a lift in global prices has eased fears of deflation.

With a cyclical upturn in prices rather than volumes driving much of the lift in nominal (dollar) activity, the course of both commodity prices and wages become crucial. Commodity markets have been softening recently, which should feed into lower rates of industrial cost inflation. Wage growth has remained surprisingly subdued, despite sizeable falls in unemployment in several economies. This emphasises the importance of volume growth picking up to lift global growth momentum.

Our forecasts point to a further modest lift in global output growth, despite disappointing first quarter outcomes in some big economies. We expect growth to lift from 2016’s near 3% rate to 3¼% this year, before accelerating further to an around-trend rate of 3½% in 2018 and 2019’s growth pace should be fairly similar.

Given the focus in Australia on sluggish pay growth, we look in more detail at wages across key advanced economies. Recent falls in unemployment have frequently failed to deliver the anticipated degree of pick-up in wages with at best modest gains in real wages and some outright declines. The extent to which subdued wage growth reflects a fundamental change in the bargaining environment or there is just a delay before tighter labour markets lift pay remains to be seen.